Baird Fixed Income Insights: Convexity Pulse
Aug 31, 2026 · 44 min · 9 segments
In this week’s Convexity Pulse, Kirill Krylov and Steven Scheerer are joined by Bloomberg Intelligence MBS Strategist Erica Adelberg to examine the “hidden costs of cheap” across housing and mortgage…
Erica AdelbergGuest
Kirill KrylovHost
Steven ScheererHost
And policymakers certainly aren't short on ideas for trying to bring housing costs down.
The interesting question, at least to me, and I think for our mortgage investing listeners... is what is the total economic cost of making housing more affordable? Lower LLPAs, streamlined refinancing, GSE purchases, treasury buybacks.
Every one of those bad boys can have, let's call it, second-order effect somewhere else in
You know, as we were preparing for this discussion, a particular phrase jumped out to me as a fascinating way to sum up a lot of these topics.
Erica, you mentioned the hidden cost of cheap, which I think is a great way to start.
When policymakers try to make mortgages cheaper, where do those hidden costs ultimately show up?
Yeah, that's first of all, I definitely agree that housing affordability is on the ballot this year.
It just seems to be top of mind for a lot of voters and therefore for candidates.
But some of the proposals that the government is making and in some cases have already implemented might actually backfire a little bit and make mortgage rates more expensive for the average borrower.
For example, you know, even the recently implemented extension of Credit scoring, to include Vantage scores as well as FICO's, which they're calling credit modernization, might lead lenders to game the system to pick the score that gets the best rate for the borrower, which sounds great on the surface, but since they'll probably use that strategy for refinancings as well as purchase mortgages, That could wind up increasing refinancing risk and therefore increasing the negative convexity risk for investors, who then might require higher yields for mortgage-backed securities.
And similarly, and maybe even more directly, that could happen even more quickly if FHFA lowers low-level pricing adjustments, LLPAs, or implements streamlined refinancings, which have also been on the list of potential policy proposals.
Credit score monetization, where you kind of expand that credit box, also potentially increases credit risk for the GSEs themselves as the guarantors.
So they may themselves have to raise G fees to compensate, which also gets passed through to borrowers.
So all of these things which sound great on the surface in terms of trying to lower mortgage rates could actually result in at least the same or maybe even higher mortgage rates for borrowers.
And policymakers certainly aren't short on ideas for trying to bring housing costs down.
The interesting question, at least to me, and I think for our mortgage investing listeners... is what is the total economic cost of making housing more affordable? Lower LLPAs, streamlined refinancing, GSE purchases, treasury buybacks.
Every one of those bad boys can have, let's call it, second-order effect somewhere else in
You know, as we were preparing for this discussion, a particular phrase jumped out to me as a fascinating way to sum up a lot of these topics.
Erica, you mentioned the hidden cost of cheap, which I think is a great way to start.
When policymakers try to make mortgages cheaper, where do those hidden costs ultimately show up?
Yeah, that's first of all, I definitely agree that housing affordability is on the ballot this year.
It just seems to be top of mind for a lot of voters and therefore for candidates.
But some of the proposals that the government is making and in some cases have already implemented might actually backfire a little bit and make mortgage rates more expensive for the average borrower.
For example, you know, even the recently implemented extension of Credit scoring, to include Vantage scores as well as FICO's, which they're calling credit modernization, might lead lenders to game the system to pick the score that gets the best rate for the borrower, which sounds great on the surface, but since they'll probably use that strategy for refinancings as well as purchase mortgages, That could wind up increasing refinancing risk and therefore increasing the negative convexity risk for investors, who then might require higher yields for mortgage-backed securities.
And similarly, and maybe even more directly, that could happen even more quickly if FHFA lowers low-level pricing adjustments, LLPAs, or implements streamlined refinancings, which have also been on the list of potential policy proposals.
Credit score monetization, where you kind of expand that credit box, also potentially increases credit risk for the GSEs themselves as the guarantors.
So they may themselves have to raise G fees to compensate, which also gets passed through to borrowers.
So all of these things which sound great on the surface in terms of trying to lower mortgage rates could actually result in at least the same or maybe even higher mortgage rates for borrowers.
The rest of this transcript — segmented and speaker-labeled, so you land on the exact moment something was said
Search every transcript — by keyword, by phrase, or by meaning, across every show Radar indexes
Trends — what is surging across podcasts, measured against its own baseline
Alerts — when a name you follow appears in a newly indexed episode
No account is needed to search Radar.